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OPEC Works Toward Deal as Saudis Propose Plan for Higher Output

(Bloomberg) -- The odds of OPEC reaching an oil-production deal increased as Iran edged away from a threat to veto any agreement that would raise output and Saudi Arabia put forward a plan that would add about 600,000 barrels a day to the global market.

At the end of a day of diplomatic back-and-forth in Vienna on Wednesday, delegates were increasingly positive that a deal would be reached at Friday’s meeting of the Organization of Petroleum Exporting Countries.

After sitting down with several counterparts, Iranian Minister Bijan Namdar Zanganeh said he was optimistic about the outcome of the OPEC meeting, a marked contrast to comments on Tuesday when he said a deal was unlikely. He also spoke with Russian Energy Minister Alexander Novak by phone.

“I’m confident that at the end of the day reason will prevail,” Saudi Energy Minister Khalid Al-Falih told reporters in Vienna after a succession of meetings. He echoed earlier comments from OPEC Secretary-General Mohammad Barkindo.

With two days until ministers from the OPEC formally meet in Vienna to decide on policy, delegates attempted to find a plan to boost production and ease consumer anxiety about high oil prices that wouldn’t provoke a veto. The talks, held as the cartel hosted an international energy conference attended by hundreds of officials, executives and investors, will shape oil prices, energy stocks and currencies of petroleum-exporting countries for months to come.

Complex Calculation

The Saudi proposal involves a complex calculation based on how much the group has cut production beyond the initial target of 1.8 million barrels a day set in 2016, the delegates said, asking not be named discussing private meetings.

Saudi Arabia and its allies estimate that total cuts now amount to 2.8 million barrels. The paper agreement would see production increase by 1 million barrels a day to bring the group back to target. However, because most countries can’t increase production, that would probably translate to just 600,000 barrels coming back on to the market -- an increase in global production of about 0.5 percent.

The convoluted plan shows the difficulty Saudi Arabia has in bridging the gap between Russia, which has pushed for a larger increase, and Iran. The proposal has yet to win the backing of all OPEC members, and may meet resistance from more hawkish countries in the group including Venezuela and Algeria as well as Iran.

Saudi Arabia, under pressure from U.S. President Donald Trump, wants to unwind some of the cuts by engineering a “moderate” supply boost in the second half of the year. Russia is pushing for an even larger quota increase of 1.5 million barrels a day.

Iran, with some support from Venezuela, has so far rejected any increase, including one compromise mooted in private by some OPEC officials for a 300,000-to-600,000 barrel-a-day hike in the second half of the year.

There’s a good reason for the two countries’ opposition -- neither have the ability to increase their own production. Iran faces constraints on its oil exports after Trump reimposed sanctions on May 8. Venezuela’s oil industry is collapsing due to years of mismanagement and an economic crisis.

When OPEC and its allies, which include Russia, Kazakhstan and Mexico, agreed to cut output in late 2016, they announced a 1.8 million-barrel-a-day reduction. But problems in Venezuela, Mexico and other nations mean the reduction in May was far higher.

Oil prices surged nearly 75 percent, touching $80 a barrel, after OPEC and allies agreed to cut production in late 2016. That surge prompted the U.S. president to complain on Twitter that the cartel was artificially inflating prices.

Trump’s involvement makes it difficult for Tehran to accept a compromise. Zanganeh has said the president is to blame for high prices because of his unilateral withdrawal from the international nuclear agreement.

“OPEC is an independent organization, not an organization to receive instruction from President Trump,” Zanganeh said on Tuesday. “OPEC is not part of the Department of Energy of the United States.”

OPEC takes its decisions by unanimity, so if Iran were to wield its veto Saudi Arabia would be left only with the option of assembling a coalition of willing countries to bypass Tehran’s opposition. Riyadh could also act unilaterally boosting output, as it did in 2011 after a meeting ended in acrimony without a deal.

"OPEC is listening to consumers,” Bob Dudley, the chief executive of BP Plc, said on the sidelines of the OPEC conference in Vienna. "They pay attention to consumer nations."